New Tax Withholding Tables Are a Down Payment on Big Middle Class Tax Cuts

MIAMI, FL - DECEMBER 22: A copy of a IRS 1040 tax form is seen at an H&R Block office on the day President Donald Trump signed the Republican tax cut bill in Washington, DC on December 22, 2017 in Miami, Florida. Kathy Pickering, vice president of regulatory affairs and executive director of The Tax Institute at H&R Block released a statement about the new tax bill saying, ' It's going to change the way you think about and plan your income taxes. You'll need to take a fresh look at your individual situation to know your outcome and new strategies to use to get the best tax outcome.' (Photo by Joe Raedle/Getty Images)

The new IRS payroll withholding tables are out, and they are predictably being downplayed by the same mainstream media that didn't want to talk about tax relief for the middle class in the Congressional debate over the Tax Cuts and Jobs Act. In fact, the new withholding tables are an immediate pay hike for the middle class, and portend even bigger refunds to come.

In order to put meat on the bones of how big a pay increase we're seeing, I took four typical household profiles as seen below. For each household, I assumed zero exemptions from withholding in both 2017 and 2018 (the exemption amount of $4050 did not change in the new tables). Thus, those with non-zero payroll exemptions would have less withheld in both the 2017 and 2018 scenarios. I've also limited the scenarios to a reasonable definition of middle class--if you're earning more than this, you've graduated to mass affluent in most areas of the country.

All withholding is annualized.

Frank and Fiona, a family of four with two kids making $120,000

This is your typical, blue state middle class family that is probably a little worried about losing their full SALT deduction and personal exemptions. They shouldn't worry too much.

2017 withholding: $19316

2018 withholding: $15738

2018 pay raise: $3578

That's nearly $3600 over a whole year. Come tax time, they are also likely to get a refund unless they have accounted for the two $2000 child tax credits they have waiting for them--the withholding tables cannot predict that.

This is enough money to pay for a family vacation on the Jersey Shore, or keep two cars full of gas all year, or pay for about half the grocery bill. That's real savings to this family, not the "crumbs" that House Minority Leader Nancy Pelosi decried earlier this year.

Dave and Diane, a dual income couple making $80,000

Maybe these are empty nesters who are on the downside of their careers, and maybe they are a young professional couple looking to start a family.

2017 withholding: $9770

2018 withholding: $7833

2018 pay raise: $1937

That's nearly an extra $2000 over the whole year. They can use that money to help save for a first home (or pay off the mortgage on the one they raised their kids in).

Helen, a single Mom with two kids making $60,000

Helen works as a secretary for Warren Buffett, or at least that's what she tells her Dad at Christmas. She actually works at Warren's Buffet as a waitress.

2017 withholding: $10,164

2018 withholding: $8326

2018 pay raise: $1838

Helen is also due to get a pretty good refund at tax time due to two factors: the withholding tables don't distinguish between single taxpayers and those who are "head of household" (a more generous status); secondly, she will get a $2000 per child tax credit for her two children. Still, getting a pay raise now of $150 a month is not a bad down payment.

Susan, a single woman making $40,000

Susan is a few years out of college and living on her own. She wishes she had a little bit more money in her paycheck every week.

2017 withholding: $5189

2018 withholding: $4166

2018 pay raise: $1023

Getting a little more than $1000 in your paychecks may not mean a lot for hedge fund guys in San Francisco, but it means a lot to Susan. On the advice of her friends, she's putting this $1000 into a Roth IRA where it will grow tax-free for her retirement.

Will people notice?

The withholding changes coming in February are substantial. They are bigger than the "Making Work Pay" credit, which in any event was a temporary tax cut. That tax cut was equal to 2 percent of pay up to the Social Security wage base of around $120,000. This withholding relief is set in place for at least the next eight years (and should have a permanent behavioral change), and is bigger than 2 percent of pay for each of the households profiled. These pay raises are all between 2.4 percent and 3.1 percent, which is likely representative for most taxpayers.

Some may point out that the numbers above are expressed annually, whereas most people get paid either 24 (semi-monthly) or 26 (every two weeks) times a year. Let's take the two ends of this. Do you think a family of four making $120,000 could use a payday bump of $150? I bet they think so. Or think back to when you were younger and single--could you have used an extra $45 on a Friday night?

It also bears repeating that these numbers assume zero exemptions from withholding. If the taxpayers with kids account for their expected child tax credit amounts, or Helen accounts for her more generous head of household status, etc. these numbers get even larger. Taxpayers are not only likely to see an increase in tax-home pay, but they are also very likely going to see refunds at tax time next spring.